In 2023, both the Australian Federal and State Governments are expected to continue to increase their efforts to secure domestic supplies of coal and gas, as they attempt to address projected supply shortages, creating, as some stakeholders say, a type of 'resource nationalism.' For those stakeholders, operating in the Australian resources market in 2022 was a period of frustration. Government intervention into the resources market is said to have stifled investment opportunities and profitability within the market, as demonstrated by the industry outrage to the new royalties introduced for coal by the Queensland Government and the gas price caps imposed by the Federal Government.
Critical minerals continue to be a star performer in Australia's resources portfolio in light of the acceleration of the global energy transition. Given Australia is a key producer of many strategic minerals, it remains well-positioned to leverage itself as a destination for the production, processing and manufacturing of critical minerals. The Free Trade Agreement between Australia and the United Kingdom which was signed in 2021 (but not yet in force) along with the Australia-India Economic Cooperation and Trade Agreement which entered into force on 29 December 2022 also represent significant export opportunities for Australia to support further growth and investment in its critical minerals.
Broader geopolitical issues and tensions have also created competing pressures in the resources market, and this is likely to continue throughout 2023. Ongoing supply chain disruptions have slowed economic growth, and in major manufacturing hubs, including Shanghai, Beijing and Guangdong, there is ongoing pressure on demand for a range of metal ores used in manufacturing. Despite the ongoing push to transition to clean energy generation, the energy and supply pressures coupled with increased commodity prices, are expected to produce a slower transition from coal. This has seen, to some public opposition, the extension of the lifespan of some coal mining projects and the approval of a number of new coal mining projects.
All things considered, the fluctuating market and the competing geopolitical pressures and policies offer a veritable smorgasbord of opportunities for all players within the Australian resources and renewables sector.
Following record highs of USD400+ a tonne in the wake of the Russian invasion of Ukraine, metallurgical coal prices have dipped, although remain at levels well above average. The outlook for 2023 remains bullish, in part driven by China's rumoured decision to end its unofficial ban on Australian coal. Equally, thermal coal prices are expected to remain strong over the course of 2023, although, like metallurgical prices, are also down from the dizzying heights of early 2022. Overall, Australia's coal export earnings are expected to remain strong, but face the risk of potential supply disruptions such as heavy rainfall and strikes at BHP operations, as well as reservation and price cap policies for thermal coal, introduced as part of the Federal Government's Energy Price Relief Plan introduced on 9 December 2022.
Oil and gas
As global sanctions on Russian crude and refined oil flows continue to take shape, combined with China's COVID-19 policy and a general world economic decline, oil and gas consumption is expected to decrease through 2023. The Federal Government's recent cap on gas producers from entering into agreements for the supply of gas at a price greater than $12/GJ has also caused producers to re-evaluate their position in the market. Jet fuel demand, however, has grown strongly with forecasts showing a 13% year-on-year increase, due to increased intra-European flights as the world emerges from the COVID-19 travel gloom. Oil prices continue to decline slowly going into 2023, with average estimates of USD93 per barrel, although forecasts are made uncertain by further sanctions imposed on Russian oil exports in February 2023.
Due to increasing bond yields, gold prices dipped slightly in September 2022, averaging USD1,728 per ounce, before recovering slightly to USD1,750 per ounce by mid-November 2022. The market is seeing continued demand for gold due to record breaking central bank net purchases, with a global increase of 28% going into 2023. Australia remains poised to take advantage of this growing market with an increase in production of 5.4% with global exports increasing by 23%.
Lithium, vanadium and others
The demand for electric vehicle batteries has contributed to a strong lithium market. Spodumene prices surged to USD2,700 per tonne in 2022, significantly increasing from USD1,300 per tonne in 2021. Major global automakers are continuing to accelerate plans to transition to electric vehicles (EV) by converting their existing manufacturing capacity and developing new product lines, while discontinuing fossil fuel-driven products. As a result, the underlying demand for lithium is forecast to increase from 745,000 tonnes of lithium carbonate equivalent in 2022 to 1,091,000 tonnes by 2024. Due to the expected explosion in demand, Australia's export revenue for lithium exports is expected to reach $16 billion, a significant uptick from the record $4.9 billion in 2021-2022. Similarly, Australia's vanadium market has seen a strong 5% increase over 2022 and is expected to continue trending upward given the anticipated acceleration of EV production. Nickel prices are also significantly benefiting from the increasing demand for electric vehicle batteries, with Australian nickel export earnings expected to rise to $5.1 billion, a 17% increase from $4.4 billion in 2021-2022.
Following a significant drop in 2021, iron ore prices have stabilised through 2022 and remain well above the cycle low in November 2021. However, continued outbreaks of COVID-19 in China have compounded weaknesses in China's residential property and manufacturing sectors, causing a significant downturn in construction activity, with strong expected exports offset by weak domestic demand for steel and iron ore. China continues to rely on fiscal stimulus to boost its economy and is forecast to allocate more than USD700 billion in special purpose bonds, with the majority intended for new infrastructure investment to boost steel and iron ore demand through 2023. In the meantime, Australia remains the world's largest iron ore producer, with $133 billion earned in exports through 2021 and 2022, with further greenfield supply coming online from major producers. Exports are forecast to increase by more than 2.5% through 2023 to 896 million tonnes.
The Federal Government has secured support from the Greens Party on its push to amend safeguard mechanism provisions to further manage emissions reported by the nation's largest emitters as well as improve transparency regarding the impact of new projects.
Under the mechanism, 215 of the country's biggest emitters (those who emit more than 100,000 tonnes of GHG/year), will be tasked with ensuring their net emissions remain below a now more challenging emissions baseline.
With fines of $275/tonne applying to companies who fail to comply, the Government has and will likely remain active in identifying measures to assist Australia to realise its now legislated targets, including incentivising the generation of carbon offset credits by emitters that keep their emissions consistently below baseline levels.
While some commend the move as pushing emitters to make tangible and significant progress to cut their emissions, others query the Government's rushed and frantic approach, highlighting the current proposal's shortcomings in the carbon credit loopholes available to emitters. Despite repeated attempts by the Federal Greens Party to link their support for this Policy to a pledge for no new coal or gas developments, the Federal Government has vocally rejected this. However, the agreed hard cap on emissions will ultimately impact the development of new and expanding coal and gas projects.
Geopolitical changes and their impact on the Australian market
Despite Northern Hemisphere countries managing to build energy stockpiles for their winter, the sanctions placed on Russia, as one of the world's largest energy exporters, have caused significant disruption in global energy sectors. The constraints on Russia's transport and infrastructure caused by the war are expected to prevent the diversion of Russian energy commodities to countries without sanctions in place in 2023, thereby further reducing the supply of Russian energy commodities. As supply lessens, the Australian Government Department of Industry, Science and Resources expects the prices of energy commodities to remain high over the beginning of 2023. As indicated above, other factors that have contributed to this trend include high demand for electricity, coal-fired generator outages and heavy rainfall and flooding in New South Wales and Queensland.
In an effort to tackle the rising costs of power affecting consumers and businesses across the Australian states, on 9 December 2022, the Federal Government announced its Energy Price Relief Plan. The Plan's aims are to limit domestic coal and gas prices, provide targeted bill relief to households and businesses, and invest in cleaner, cheaper and more reliable energy for the future. The Plan is to be delivered by the Federal and State Governments, requiring both to implement their own legislative frameworks to support the Plan. While the Plan has been praised by some as a means to mitigate the immediate economic challenges posed by the energy crisis, it has been criticised by others for threatening Australia's energy security and for damaging investor confidence.
For the same reasons, sector criticism has been heard in respect of:
- the order by the Minister to cap the price for the supply or acquisition of gas at $12/KJ which was introduced in December 2022 pursuant to the introduction of Part IVBB ('gas market orders') to the Competition and Consumer Act 2010 (Cth); and
- the introduction by the Queensland Government, without consultation, of three new tiers to the coal royalty structure with effect for coal sold, disposed of, or used on or after 1 July 2022, which the Queensland Resources Council has said to have 'forced the cancellation of billions of dollars of new resources projects in Queensland.'
As Governments across the world seek to transition away from well known, reliable and cheaper fossil fuel energy resources with urgency, in the short to mid term, the push to deliver cleaner energy is expected to contribute to ongoing energy supply issues. In particular, as fossil fuel power generators come offline, inflation in energy costs is expected to rise, resulting in further uncertainty and instability in the energy market.
As we have seen over the past few years, things are continuing to fluctuate in the resources and energy sectors, and Government attempts to stabilise those sectors have been met with mixed responses. The easing of COVID-19 restrictions in China and its low inflation rates mean the Chinese Government is well placed to use fiscal levers to stimulate its economy, which we expect will cause further shifts in the Australian and global markets. It is also likely that, as geopolitical tensions and inflationary pressures settle, environmental, social and governance factors will grow in importance, presenting significant opportunities and risks for the resources sector.
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